Gold Rollercoaster Likely to Go Up

The roller coaster metaphor we used two weeks ago after the $90 flash crash
in the price of gold seems appropriate this week as well. It must be tough
out there for precious metals investors. Wednesday gold futures tumbled again.
April-delivery gold fell $51.30, or three per cent, to settle at $1,642.90
an ounce, the lowest gold settlement price in more than eight weeks. The dollar
strengthened and traders reacted to the U.S. Federal Reserve's rate decision
and policy statement in the previous session, which buried any hopes for now
of more monetary easing in the short term. Investors have been hoping that
the Fed would take action again to spur the economy. The last round of quantitative
easing, known as QE2, weakened the US dollar and sent gold prices sharply higher.
After the market closed Tuesday, the Fed's upbeat comments about the US labor
market dimmed hopes of further stimulus. Also Tuesday afternoon J.P. Morgan
announced it had passed the government's stress testing and was declaring a
dividend as well as paying back a big chunk of government loans. Most of the
largest U.S. banks passed their annual stress test, underscoring the recovery
of the U.S. financial sector. The U.S. dollar index traded higher Wednesday,
hitting a fresh seven-week high, also bearish for the precious metals markets.
Year to date, gold is still up 5 percent.

Sunshine Profits subscribers should have a much less queasy stomach. A day
before the flash crash we sent out a Market Alert to stay out of the speculative
long-term positions saving them from the gut-wrenching drop. And when we sent
out another Market Alert with a buy signal on March 6th it was with a caveat
- to be prepared emotionally for the scenario in which metals move temporarily
lower for a few days and then form a bottom. We believe the price action of
the past few days could be that the final bottom for this decline has already
been reached, or, is very, very close to it.

Gold's sharp move lower will most likely spark demand from emerging markets
such as India and China as buyers will come in lured by lower prices.

To see if gold will be able to catch up, let's move to the technical part
of today's essay. We start with the USD Index chart (charts courtesy by http://stockcharts.com.)

Our first chart this week is the very long-term USD Index chart. There have
been some slight changes this week as the index level has touched the horizontal
red line in our chart created by the early 2011 and 2012 highs. Prices then
reversed and no breakout above this level was seen.

Concerning the long-term declining resistance line, prices have moved just
above it but the breakout is not yet truly in. Prices would have to close the
week and hold above this line for two more weeks for this breakout to be confirmed.
Overall, the situation remains mixed here.

In the short-term USD Index chart, a correction is seen to the highest Fibonacci
retracement level of the previous decline. It appears that a top is about to
form. Prices could move a bit higher, though any significant increase seems
unlikely, and the 2012 high will probably not be reached. Perhaps some sideways
trading and then some declines will precede the next cyclical turning point,
which is about two weeks away.

The Correlation Matrix is a tool, which we have developed to analyze
the impact of the currency markets and the general stock market upon the precious
metals sector. The correlation between the general stock market and precious
metals now appears to be negative to neutral, and this is generally not the
case, especially given the past three months.

The general stock market simply does not appear too important for gold, silver
and the gold and silver mining stocks. However, it does seem to matter for
platinum, which has performed relatively well compared to the other metals.

The strong negative correlations between the USD Index and the precious metals
continue. The implications appear bullish for the medium term and somewhat
unclear for the short term.

The medium term implications remain in line with our overall view on the precious
metals sector as expressed in our essay on a possible rally
in gold. We wrote then (March 14th, 2012):

(...) while it is not yet certain that the final bottom is in, it seems
rather unimportant because gold's price does not seem likely to decline much
further and could actually move much higher very soon. The risk of being
out of the market outweighs the risk of being in.

This week we have also received an interesting question from one of our
Subscribers and would like to comment on it.

Q: Regardless of the self-similarity patterns [that we're described
in the previous essay] (which is not the most scientific tool out there), is
there any chance that we currently see the beginning of the situation similar
to what was seen in Sep-Dec 2011?

Additionally, what about the price seasonality? March-April is generally weak
for the precious metals... Maybe the predicted rally will materialize so sooner
than in April-May - during metal's stronger months?

A: Naturally, self-similar patterns (just like any other chart pattern)
are not scientific at all (but we are working on "making them scientific",
stay tuned) as they are not (as Karl Popper indicated) falsifiable.
They are subjective and very much analyst-dependent and detecting these patterns
is somewhere between art and science. However, that's not the most important
thing here. The most important thing in our view is simply that they work and
are extremely useful as they provide both: price and time projections that
- if previous patterns are really aligned - play out very well.

Is there any chance that gold will move even lower like in Dec 2011? Of course
- there are no sure bets. However, at this time we view the chance of moving
higher from here is much bigger than the chance of a continuation of the decline.

Seasonality - a picture can tell a thousand words, so let's take a look.

Please focus on the shape of the red line vs. dates instead of the prices
on the vertical axis' legend (technical glitch). While it is true that March
is generally a weak month for metals, please note that the weakness is concentrated
in the first half of the month and this impacts the whole March-April period.
In fact, April is moderately favorable month.

The most interesting part is that according to the True Seasonal (taking into
account options' and futures' expirations as well as simple seasonalities)
pattern, the bottom was likely to be seen on March 14th... Precisely when gold
appears to have reached the bottom. Please note that the quality of projection
measure on the chart is quite high for this date, meaning that the probability
of bottom being in close to this date is high.

Summing up, the situation in the USD Index is unclear for the short
term and bearish for the medium term. This translates into a bullish environment
for gold for the medium term and the True Seasonal patterns confirm that.

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
Opinions and analyses were based on data available to authors of respective
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Radomski, CFA and his associates do not guarantee the accuracy or thoroughness
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